Glossary · UK
What is Transfer Pricing?
Rules requiring transactions between connected companies in different tax jurisdictions to be priced on arm's length terms, following OECD guidelines.
Full Definition
Transfer pricing refers to the prices charged in transactions between connected parties -- typically companies within the same multinational group -- across different tax jurisdictions. The UK transfer pricing rules (found in Part 4 of the Taxation (International and Other Provisions) Act 2010, TIOPA 2010) require that where a transaction between connected parties is made on terms that differ from those that would have been agreed between independent parties dealing at arm's length, the UK tax computation must be adjusted to reflect the arm's length price. The arm's length principle is the international standard set out in Article 9 of the OECD Model Tax Convention, and the UK follows the OECD Transfer Pricing Guidelines. The rules apply to both cross-border and, in certain circumstances, purely domestic transactions (where one party is not subject to full UK tax, for example because it has losses). HMRC has broad enquiry powers to challenge transfer pricing arrangements it considers non-arm's length, and can raise additional tax assessments. Large businesses are required to maintain contemporaneous transfer pricing documentation. The UK has an Advance Pricing Agreement (APA) programme that allows businesses to agree the transfer pricing methodology for future transactions with HMRC in advance. Penalties for non-compliance can be significant. Transfer pricing is one of the most complex areas of international tax and typically requires specialist advice from tax professionals with experience of both UK law and the relevant OECD guidance.